Required minimum distributions aren't a bad thing

Q: This is about required minimum distributions. I find it very strange and upsetting. We are taught to save and invest for our future and own good, and then we are forced to spend part of what we have saved. Worse, then we have to pay taxes on every dime. A plan like that from business would be called a "scam."

What is the origin of this plan, and whose idea was this? I never hear the RMD plan discussed either pro or con. Now that it is in place, it is just ignored and we are supposed to just go along with it. You can see it is not my favorite subject. Perhaps you can point out the value of it and improve my outlook. - J.H., Seattle

A: RMDs aren't an evil plot. The purpose of qualified accounts of all kinds - IRAs, 401(k)s, 403(b)s, etc. - is to encourage people to save for their retirements by letting them defer taxes on income they save and the returns earned on that saving. That's a good idea, and tax deferral is a good incentive.

But the idea isn't to build a large estate for another generation. It is to provide for your retirement. As a result, when you take distributions you have to pay taxes that have been deferred for many years.

Also, the distribution rate isn't punishing. At age 70, long after most people have retired and started making withdrawals voluntarily, the initial withdrawal rate is only 3.65 percent. More important, even as the withdrawal rate rises with age, the odds are that most people will die with assets rather than without assets. How can they do that? Easy: Never withdraw more than the RMD.

Reader letters bring a lot of worries. I would dearly love it if the biggest concern of all readers had to do with RMDs. It would be a sign that everyone had enough income to sustain his or her retirement.

This doesn't mean that seniors don't have legitimate complaints. The most important complaint is that the original virtue of these plans was that you could expect to save money that would be taxed at a high rate and withdraw it in retirement when you could expect a lower tax rate. Today, that isn't so for middle-income workers who have been successful savers, thanks to the taxation of Social Security benefits.

Q: About 10 years ago, my elderly mother was diagnosed with Alzheimer's. As an only child, now 72, I sold my personal dwelling and moved in as her caretaker. Fast-forward to 2016: The Alzheimer's was a moderate case. But now at 96, she is within weeks of death. Her health care has brought havoc to my personal finances.

I am now faced with a small income, $2,400 per month, virtually no assets and a small debt. Her house, which I will inherit, is worth about $325,000. I have maintained it very sparingly and, if I stay, it will need renovating. That should raise its value to $375,000 to $400,000. I have considered a reverse mortgage because once the renovations are completed, it should be relatively maintenance-free for several years.

Friends say to sell it and rent. Average rents here are about $1,500 a month, but I am not comfortable with that idea. I feel I could get by on about $3,300 to $3,500 each month by staying in the home. Any advice? - L.W., by email

A: Yes, you could take out a reverse mortgage. You could use a portion of the credit line to renovate the house. Then you could use the remainder to supplement your income. But whether the numbers worked would depend on how much the renovations cost, and the cost of supporting the house when you were done.

Another thing to consider is that figures that work today aren't likely to work 10 or 15 years from now. Basically, this looks tighter than you'd want for true security.

A better move would be to use the equity in the home to liberate yourself, restoring your lost savings and having the pleasure of deciding where you wanted to live. I think most readers would agree that you are due for some carefree years. Selling the house and becoming a renter, as your friends suggest, could be a powerful step.

• Scott Burns is a principal of the Plano, Texas-based investment firm AssetBuilder Inc., a registered investment adviser. Questions about personal finance and investments may be sent by email to scott@scottburns.com.

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